A simulation based investigation of inventory management under working capital constraints

Abstract

The objective of inventory management models is to determine effective policies for managing the trade-off between customer satisfaction and the cost of service. These models have become increasingly sophisticated, incorporating many complicating factors that are relevant in practice such as demand uncertainty, finite supplier capacity, and yield losses. Curiously absent from these models are the financial constraints imposed by working capital requirements (WCR). In practice, many firms are self-financing; their ability to replenish their own inventories is directly affected not only by their current inventory levels, but also by their receivables and payables. In this paper, we analyze the materials management practices of a self-financing firm whose replenishment decisions are constrained by cash flows, which are updated periodically following purchases and sales in each period. In particular, we investigate the interaction between the financial and operational parameters as well as the impact of WCR constraints on the long-run average cost.

Factoring policy with constant demand and limited capital

“…Bendavid et al. () consider a multiperiod inventory problem for a self‐financing retailer without external loan availability and find the optimal base‐stock level by simulation. Their numerical experiments show that a longer collection period of AR leads to larger long‐run average cost.…”

“…Their numerical experiments show that the required working capital target inflates rapidly when downstream payment delays increase. Bendavid et al (2014) consider a multiperiod inventory problem for a self-financing retailer without external loan availability and find the optimal base-stock level by simulation. Their numerical experiments show that a longer collection period of AR leads to larger long-run average cost.…”